My 9 steps to buying a buy-to-let
Last year I purchased my first property at the age of 36. Quite late you might think but we all have to start somewhere. My first property wasn’t for me. I bought it as a buy-to-let investment. My situation is a bit different from most as I live and work overseas. This also meant that it would have been difficult for me to have gotten a mortgage in the UK so my first property I financed the hard way by saving up and using a small personal loan from my bank. As it was the first time purchasing a property I had no idea what I was doing and had to learn along the way. Here are the 9 steps I took:
1 Estimate your budget
Probably the most important thing to begin with as this will determine what type of property and the area your can afford. Make sure you arrange finance. For me I took out a £15,000 personal loan from Barclays Bank. I have been a customer with them since I was a university student and the 3.7% fixed interest rate meant it was probably much better value than a traditional mortgage especially when you take into the huge mortgage arrange fees charged by most lending institutions. My loan term is 5 years of which I am about 18 months into. On top of the £15,000 personal loan I had £13,000 in a savings account, £36,000 in an ISA and about £6,500 in my current account. Therefore my maximum budget was £70,500. Obviously I wouldn’t want to spend it all as I would invariably need money to paid for the void period between the purchase and finding a paying tenant not to mention the costs of actually buying the place such as solicitors fees, etc. So looking at this my maximum budget looked to be £65,000 although I would do my best to be under this as £5,000 looked like a fairly low contingency budget. In fact between the purchase and receiving my first rental payment I spent a further £3,000. Ranging from decoration costs due to some water damage to fitting smoke alarms, solicitor fees to council tax, landlord insurance to landlord registration, marketing fees to a new mattress. In the beginning the fees can seem endless.
2 Choose an area
Once you know your budget you can research your area. Your initial search will no doubt start on the internet, probably looking on a website like Rightmove or Zoopla. When you have found a few area that look like they are in budget it’s a good idea to visit the area on foot. I prefer to go on foot as you get more of a feel for the place. It’s pretty hard to tell how friendly a neighbourhood is looking out of the window of your car. Next look for signs that the area is attractive to tenants. Is there a park? Are there some nice cafes and restaurants? Is it beautiful? If you wouldn’t want to live in the neighbourhood yourself don’t expect anyone else to. This might sound like I’m describing some expensive middle class area of the city but you might be pleasantly surprised about some neighbourhoods that have bad reputations. Often these reputations can be hard to shake off and what might have been true 10 years ago is often replaced by exciting and up and coming areas. I personally like areas where students live as they tend to be cheap but also have low crime rates.
3 Run the figures
When you have decided on an area it’s time to focus in on some potential properties. Get the home report from the agent to check what kind of condition the property is in. Then estimate the costs of repairs, decorations and upgrades. As this was my first purchase and I don’t really have much expertise in this area I decided to go for a place that was in pretty good condition. If you know what you are doing then you can easily add value doing a place up and renting it. But for my first venture I was looking for something a bit easier. Generally avoid anything that needs a new kitchen or bathroom as these tend to be the most expensive areas to fix.
Estimate the rent. This is sometimes included in the home report. If not then it should be fairly easy to estimate by looking at similar places in the same area and seeing what they rent out at. Calculate the rental yield (gross annual rent divided by the purchase price) and see if this looks attractive. I tend to reduce this by 30% to cover management fees, maintenance costs and other costs such as insurance, factoring and regulatory commitments such as gas certificates, etc. On the property I purchased the gross yield was about 10% so I’m looking at 7% after costs. On top of this you also have house price appreciation. I suggest you don’t go crazy and assume the value will increase 20% year on year. I tend to be conservative and estimate the price will keep up with inflation so there’s another 2.5% a year. So far the figures look good at 9.5% estimated return on investment. If you are using financing to purchase your buy to let then it’s very important to calculate your cash flow. The gross rent on my apartment is £500 a month, allowing for 30% costs leaves me £350 a month which easily covers my personal loan which is about £270 a month (fixed) and will be fully paid off in 3 and a half years. Unless you are prepared to prop up your investment with your savings aim for a positive cash flow. This is especially true if you have a mortgage where the interest rates could increase.
4 Viewings
Always view. Pictures on websites often lie, miss out negative aspects in a property or may just be old photos. This also gives you a chance to meet with agents and become familiar with which agents are good and which are useless. You will probably be using the same agents or at least the same companies when you rent the property so being a buyer gives you the opportunity to scout for a future letting agent first hand.
5 Find a solicitor
I didn’t know where to look for a solicitor so I googled for solicitors in my area. I then emailed half a dozen to introduce myself and explain the reason for my purchase and ask for a ball park quotation for their service and any other fees they charged. Out of 6 you should expect 2 or 3 to answer you. I guess the others are busy or don’t want the business. If they take more than 24 hours to reply to you (if it’s a weekday) then I would be cautious about using them. I wanted to find someone efficient who will answer the phone when I call and not take days to get things done. Also don’t go for the cheapest quote here unless you think it’s the best. I paid almost £700 for my solicitor which was actually one of the highest quotes I received but they seemed to reply the quickest and gave the most thorough replies to my queries. I think for a big purchase like this it’s worth paying for quality.
6 Find a property and make an offer
Make an offer. Remember what you pay will affect your bottom line. Rerun the figures to give yourself a maximum budget and be prepared to walk away if the figures don’t stack up in your favour. When making an offer I went directly to the agent. Some people make offers via their solicitor but I didn’t really see the need to involve the solicitor until I have a verbal offer accepted. Once the offer is accepted you can let your solicitor deal with things. If you have found a quality solicitor then this should be stress free. Make sure you have the money ready in your account to transfer.
7 Find a letting agent
This is similar to finding a solicitor. Definitely use your contacts from when you were searching to buy the property. By this stage you should have some idea which agents are more professional and which ones never answer the phone or call you back. I assume if they can’t answer the phone to a landlord they have no hope of finding a tenant or keeping the tenant happy when things go wrong. An unhappy tenant is much less likely to renew a lease giving you void periods, marketing fees, and not to mention inventories and cleaning bills. Again cheapest is not best. I had two agents view the property and give me rental quotes. Both seemed professional. The first quoted £420 a month rent with quite a competitive management fee. The second, who I had had very positive dealings with during my property search although didn’t purchase the property through them, quoted £500 a month but with higher fees (10% management fee, 12% including VAT). Although given the big difference in valuations I was confident the second agent could achieve their figure especially given their more professional operation and potentially better client base. In 2 months they found a tenant at the £500 a month quotation who has been in the property over a year now.
8 Get ready for the market
As mentioned above this took 2 months from the purchase date to the date of the tenant moving in. Some minor decorating was needed as well as the fitting of smoke alarms. Regulatory inspections for electric, gas, legionnaires test of the water and electrical appliance safety checks. The agent then dealt with viewings and reference checking of suitable tenants.
9 Buy flowers
When the property was ready for viewing I made sure their were always fresh flowers in the property. The property is a large 1 bedroom apartment with huge windows that let in a lot of light. Adding a bunch of fresh flowers in a vase on the kitchen table made the property feel more like a home. As this was springtime fresh daffodils were cheap to buy at less than a £1 a bunch. I think at that price it was worth giving it a go and may have unconsciously tipped a tenants decision into renting my apartment over another in the area.
So there is what I did. I think next time I might be more adventurous and buy a doer-upper or even one at auction. Other than that I think I would do most of the above the same as before. I am happy with my agent and solicitor and realise the importance of having a solid, professional team during the process. I would love to hear others advice and opinions on the above and any things you did differently.